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Roseman: Here’s the scoop on your credit score

Your credit score is a three-digit number that can determine whether or not you get a loan and at what rate.

Many insurance companies also use credit scores to decide what you pay to protect your home and belongings from damage.

So, what does your credit score say about you? How can you get it? And how can you improve it?

Credit scoring was developed by Fair Isaac & Co. in the United States to help credit bureaus assess the risk to lenders.

Equifax, one of Canada’s two major credit bureaus, is licensed to use the FICO score, known as the Beacon score here. Its rival, TransUnion, uses a slightly different score (called Empirica).

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Your credit score is not the same as your credit report, which shows your payment history. The credit report is free for you to check, but you can’t get your credit score without paying $15 to $25 or so to check it online.

Ignore any offers of free credit scores. They’re only teasers to sell you something else, such as a monthly credit monitoring service.

Eric Putnam spent 26 years in consumer lending before starting a company, Debt Coach Canada. He charges a monthly fee to people who want help organizing their finances and improving their credit scores.

I asked him what goes into a credit score – a secret guarded carefully by the credit bureaus.

The biggest part of the score (35 per cent) is your payment history, he says. This shows if you pay bills on time, have any unpaid debts or have been through bankruptcies, consumer proposals or debt management plans.

Another big part (30 per cent) is based on how much you owe.

If you carry an $8,000 balance on a credit card with a $10,000 limit – even if you pay the minimum on time each month – your credit score will drop. So, it pays to keep your balances down and not get close to your credit limits.

Another 15 per cent of your credit score is based on how long your accounts have been open and used. You may be a newcomer to Canada with no record of loans or someone whose spouse takes care of all credit transactions.

To be seen as a good credit risk, it’s not enough to be approved for credit. You have to use the credit you’re given.

Another 10 per cent of your credit score depends on the balance between revolving credit (such as credit cards) and instalment loans (such as mortgages or car loans).

Lenders like to see both types of credit. Revolving credit can be maxed out since the rates are high enough to absorb losses, while instalment loans with fixed payments must be approved and supervised closely.

The remaining 10 per cent of your score is based on how much new credit you’ve obtained or applied for. This shouldn’t be too high a percentage of all the credit shown on your file.

If you’re shopping for credit, do it within a 15-day period, Putnam says, since that will show as one credit inquiry.

Otherwise, do your shopping with a copy of your credit score, which you can show to lenders to find out what they will offer you.

Banks may give the three-digit number if you ask, but they’re not supposed to give the context that goes with it.

Ellen Roseman writes about personal finance and consumer issues. You can reach her at eroseman@thestar.ca, 416-945-8687 or ellenroseman.com

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